From all-time highs in January to a bear market in June – 2022 was nothing short of challenging. Investors and policy makers had to jump over plenty of hurdles including high inflation, rising interest rates, and recession fears.
The Fed’s aggressive rate hikes to combat raging inflation dominated headlines throughout the year. In December, the Federal Reserve once again raised rates, however, the committee voted on raising it only 0.5%, compared to the 0.75% we saw in the previous four hikes.
Where does that leave us? Jerome Powell, Federal Reserve Chair, reiterated that this smaller rate hike is a positive sign, yet monetary policy will remain restrictive until inflation is at a palatable level. Officials are looking for slowing inflation toward the Fed’s goal of 2% sustained inflation.
Meanwhile, markets encountered one of the worst years in recent history as stocks and bond prices fell together. Investors were hopeful to finish out the year strong with a ‘Santa Claus rally,’ which is a period around Christmas when stocks rise, but instead markets closed the year with losses.
We also saw the single worst year for bond markets. As we discussed, the Fed was fixated on combatting inflation via interest rate hikes, and bond prices move inversely with interest rate. Eyes were also on the yield curve throughout the year, looking for signs of an inversion. This means that long-term Treasuries rates are below short-term rates, which historically has been a sign of a recession.
We have been monitoring all these macroeconomic developments and more while being strategic, active, and de-risking portfolios according to our slowing economic forecast.
The extensive monitoring allows us to be proactive and calculated in our decision making. Which is why, in preparation for when the time is right, our analysts are finding names, industries, and investment themes we like for growth and the long haul.
For more on our views for the year, join us for our 2023 Annual Outlook live webinar event.
The Election, Labor Markets, and Crypto
Clearly, it was an eventful year for markets and the economy. We answered questions on current events, such as:
- How will the election results impact the market and our investment strategy?
- What is the labor market telling us?
- Any updated thoughts on the crypto collapse?
While we answer each in depth in our article, ‘You Ask, We Answer: Our Views On The Election, Labor Markets, and Crypto,’ the following highlights takeaways.
The midterm election results put the government in a gridlock, suggesting that either party will have trouble executing its full agenda leading to no significant legislation and a freeze on fiscal policy.
The labor market appears healthy – lower unemployment, strong wage growth, plentiful job openings, etc. However, we are seeing signs of cracks forming, as there has been plenty of headlines announcing hiring freezes and companies making contingency plans. Those signs coupled with interest rates, it’s expected that economic activity continues to slow.
The crypto industry will have to contend with the ramifications of the FTX and US-Alameda collapse for many years, meanwhile we see essentially no impact. We don’t own positions in any companies directly exposed to crypto assets.
- Economic Cycle
- The economy is moving late cycle with speed; a recession in the US is becoming increasingly likely; the Fed is on a warpath against inflation, as it has found itself badly behind the curve and is being forced by high and persistent inflation to tighten into an already weakening economy
- Stock Market
- US stock market volatility continues; market weakness has improved valuations, however, equities remain expensive by longer-term historical standards; valuations may be partly explained by robust corporate profitability, as EBIT margins have climbed to historical highs; rising input costs are posing a risk to the ability of corporations to maintain this elevated level of profitability; returns will be harder to come by and stock selection will be increasingly important
- Bond Market
- Interest rates have risen well off their lows reflecting shifting expectations on inflation, growth, and central bank policy; corporate and municipal bond credit spreads have widened, but not enough to make them materially more attractive at this time
- Important Issues on the Radar
- Ukraine-Russia War: an environment of elevated geopolitical risk entails a general risk-off environment, lending upward support to the dollar, gold, and commodity prices
- China’s Economy: debt and property markets, as well as their plan to loosen the strict zero-COVID policy, remain major economic issues with potential spillover effects on the entire global economy; trade tensions continue to impact global trade and supply chains
- Inflation: a confluence of massive policy stimulus, tight labor markets, gummed-up supply chains, and rising energy costs have caused inflationary forces to broaden and become more entrenched than previously expected conflict in Ukraine and zero-Covid lockdowns in China have added to price pressures
Sources: Wall Street Journal
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